Wednesday, January 04, 2006

The danger of presentism

At the turn of the year, it is customary to look forward. In business and economics, we use the tried and tested technique of naive extrapolation – fastening on some current trend, projecting it forward, to exaggerated extent and with exaggerated pace. Perhaps nothing in our lifetimes will match the “new economy” era for this crass and credulous behaviour. But whenever you hear leaders and thinkers talk of globalisation, China’s rise or the challenge of an ageing population, you can be sure you are in for another dose of naive extrapolation.

The technique is effective because those who employ it can point to tangible evidence. You hear of globalisation and, look, your neighbour is driving a Japanese car. You learn of the internet’s potential and, look, everyone in the office has a high-speed connection. You hear of the rise of China and, look, the shops are selling Chinese goods. The world is becoming ever more connected and, look, your kids spend all day with mobile phones clutched to their ears.

A good anecdote is worth 1,000 statistics for a business audience (although a line that joins two points and then extends into the far distance is a useful prop). Thomas Friedman, author of the Financial Times and Goldman Sachs business book of the year in 2005, is master of this genre. With an unerring eye for current fad and striking observation, he has achieved an international reputation for prescience by telling people what is already happening.

It is much harder to persuade people of the importance of things they cannot see. Not impossible, because the most frightening threats are all around you, but invisible. Fears of radiation and electromagnetic fields play a big role in clinical paranoia and are easily whipped up among otherwise sensible people.

The millennium bug was one of the most commercially successful scams of modern times because the notion that computers contained a malevolent presence played so well to so many human weaknesses. If you can never see that a problem is there, you can also never see that it is not there, so the battlers against the bug could claim their heroic efforts had averted catastrophe. Global warming receives exaggerated attention for its intriguing combination of visibility and invisibility – the warm summer we see and feel and the threatening concentration of carbon dioxide that our senses cannot detect.

But the most important events in business and politics are generally those that we cannot observe today but will observe tomorrow, such as the (almost universally unforeseen) fall of the Berlin Wall. There is little reward for those who predict these happenings. Richard Clarke, a White House terrorism adviser, spent years unsuccessfully trying to alert his masters to the dangers of al-Qaeda and Osama bin Laden. He was disparaged before September 11, 2001 – people who worry about problems others are not worrying about are irritating – and disparaged after it – people who were right when others were wrong are even more irritating. Naive extrapolation is easier. Those who ignored the terrorist threat before 9/11 and exaggerated it afterwards still have their jobs.

The result of naive extrapolation is overestimation of the pace of short-run change and underestimation of the scale and nature of long-run change. None of us is very good at visualising worlds that are fundamentally, rather than incrementally, different from the one we know: and the things that change the world fundamentally are usually things that are not yet widely identified or understood.

Prediction is hard, especially when it concerns the future. It is safer, and more common, to predict the present: and such predictions are much better received, so that is what most futurologists do. The lesson for those who must nevertheless prepare for the future is to be uncompromisingly cynical and recognise that those who claim to know what the future holds reveal only their own ignorance. Listen to people who are genuinely expert in specialist fields rather than those who profess to understand how the business world will evolve. But most of all, recognise how little about the world we can ever really know.

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About Me

I am a student in economics. This is not to say that I'm only interested in money supply, interest rates, or exchange rates. We care about all of the things that non-economists care about - we just see them in a unique way. I am also an Indonesian - which also doesn't mean I only care about Indonesian affairs. I was just born that way.